It’s been a pretty wild ride for small-cap star Doral Financial Group (DRL) in 2014. And that ride’s continued in August as the company continues a solid run. The stock has nearly doubled in price since the start of July, roaring back from a year that had the company looking like it was on the verge of bankruptcy.
The company plunged over 60% at the start of May when it became clear it was headed for a serious liquidity crisis that had the potential to result in bankruptcy. However, a big part of the company’s problem derived from the fact that it looked on the verge of failing a stress test because the government of Puerto Rico was refusing to pay Doral some $230 million in overpaid taxes Doral was counting on to meet Tier 1 capital requirements.
Doral Bank Fought the Law and…Doral Bank Won
Well, Doral sued the Puerto Rican government for failing to live up to the March 2012 agreement and won, with the decision ultimately rising as high as the island’s supreme court. And, a funny thing happened on the way to the Puerto Rican Supreme Court: Doral won the suit. Since the victory in court, Doral has been flying high, beginning to approach $9 a share, a level it hasn’t seen since the huge sell-off in May.
At the end of July, it was reported that the bank was planning the sale of its commercial real estate business and branches in New York and Florida, a move expected to net some $700 million. Add that to the $369 million in non-performing assets the bank already shed in early July and it’s clear that the company’s taking steps to shore up its liquidity situation.
And between the legal victory and the asset sales, Doral is clearly starting to look more appealing to investors. Since the start of August, the stock’s gained over 65%.
Small-Cap Star Doral Financial Group Could be a Buying Opportunity
In the event that the worst is behind Doral Bank, it could be a pretty interesting small-cap financial play. Part of what initially made Doral a member of our 2014 small-cap stars was the solid book value of its assets, indicating that there was something solid underlying the company’s valuation. And, while the bank has clearly had no shortage of issues, it has shown plenty of resilience in bouncing back from its mid-year low.
And, if Doral keeps gaining, there’s a chance that it might hit another gear. The company currently sports a short float of over 20 percent, meaning 1 out of every 5 shares owned is connected to someone betting on Doral to fail. Certainly, such a position made plenty of sense when Doral appeared to be facing a fire-sale liquidation. And there’s plenty of reason to believe the company is far from out of the woods.
But, in the event that Doral has really worked its way out of immediate danger, the stock’s likely to continue climbing. And, if that’s the case, those shorts are likely going to need to shed their positions sooner or later, particularly if they opened them prior to the start of August. While a classic short squeeze doesn’t necessarily seem likely, the upward pressure created by traders having to buy up shares to cover their short interest could help push shares even higher for Doral.
And the August surge may be getting some help from certain technical factors. Since the MACD line crossed the signal line on August 7, the stock’s up more than 50%. If this building momentum doesn’t abate, it could leave the shorts in pretty bad shape and running for cover.
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